Bitcoin, utopianism and the future of money

Nigel Dodd
March 14, 2015

Although its long-term  impact is most likely to be seen in various applications of blockchain  technology, such as Ethereum and Factom, Bitcoin raises some important  and challenging questions about the future of money. It is important  that we do not pass up the opportunity that Bitcoin, and cryptocurrency  more generally, give us to think more deeply about the nature of money,  particularly its social nature. We can also learn much from the way in  which Bitcoin itself has developed as an alternative monetary form.

As a form of money, Bitcoin needs to be  seen in the context of changes in the global monetary landscape that  have been underway since the Bretton Woods system broke down in the  early 1970s. Since that time, national currencies have been increasingly  difficult to manage in the face of the unprecedented growth of  financial instruments being produced by banks and other complex  financial institutions that were operating in a global scale. These were  the developments being talked about by Susan Strange in seminal books  such as Casino Capitalism, from 1986, and Mad Money, from  1998. She warned that states – and, by extension, central banks – were  increasingly powerless to control the circulation of financial  instruments that had been developed specifically to deal with risks that  emerged once those very same states had abandoned exchange rate  controls. Money, which she conceived through Georg Simmel’s classic  definition of it in The Philosophy of Money  as a “claim upon society”, was being placed under threat by a series of  sophisticated financial instruments that were designed to manage global  risks. Many of these new instruments, such as derivatives, seemed to  operate like forms of money in their own right. In their path-breaking  book, Capitalism With Derivatives,  Dick Bryan and Michael Rafferty would later argue that derivatives “are  a new form of money that now provides an anchor to the global financial  system”.

As I argue in The Social Life of Money,  since the 1970s we have been witnessing two countervailing tendencies  in the world of money. On one side, there has been a tendency towards homogenization,  characterized by the growth of global financial instruments, widespread  dollarization and the establishment of various monetary unions, the  Eurozone being the largest of these. On the other side, there has been a  tendency towards diversification, marked by the emergence of  local and community currencies and other alternative, private monetary  forms such as digital currencies. While both tendencies challenge the  notion that nation-states are the ‘natural’ unit into which the monetary  world must be divided, some might argue that with the emergence of  Bitcoin and other cryptocurrencies, diversification – not homogenization  – now has the upper hand. Moreover, the state’s role in the production,  management and regulation of money has been further undermined by  disruptive innovation within the payments industry. The anthropologist  Bill Maurer calls this a  “Cambrian explosion … of business experiments with new technologies and  the systems people use every day in physical and online spaces to buy  things”.[1]These  latter developments are interesting for another reason. While the  homogenization and diversification of money referred to above seem  mainly to pose a threat to the relationship between money and the state,  the changes in the payments industry that have been mapped out in the  work of Maurer and Birch threaten to undermine the degree of control  over money that has been exercised by banks. Bitcoin is consistent with both of these historical trends.

Mainstream money is created through a combination of private banks  and the state.  Alternative monies typically involve cutting at least  one of these actors out of the system, in a process known as  disintermediation. Some proposals for monetary reform aim only for one  kind of disintermediation, e.g. ‘sovereign’ money as envisaged by the Positive Money  campaign in the UK seeks to disconnect monetary creation from banks.  Hayek’s proposals for denationalizing money (echoed more recently by  various proposals for ‘monetary freedom’ or ‘free market money’) aimed  at disconnecting money’s production from the state. Alongside other  cryptocurrencies, Bitcoin aims at both. Without a doubt, this dual  disintermediation accounts for a substantial amount of the political  appeal of Bitcoin and other cryptocurrencies. For example, these new  forms of money are attractive to those with libertarian and/or anarchist  sympathies who want to see money removed from the control of  government. The reasoning here is that governments cannot be trusted to  resist increasing the money supply when political expediency demands,  even if it results in high inflation. At their worse, the argument runs,  irresponsible governments use their powers over money creation to fund  military adventures. The prominent Bitcoin investor Roger Ver offers a  fairly extreme version of this perspective when he argues that “Bitcoin  will prevent governments from being able to just print money at will and  then use that to buy tanks and guns and bombs to murder people around  the world”. At the same time, Bitcoin appeals to the political  sentiments of those who blame the banks – not government – for the 2008  crisis, and are troubled by the power and influence of the so-called  Wall Street System, and more specifically, are critical of the  fractional reserve system that enables high-street banks to create money  whenever they make a loan.[2]  From this perspective, the problem with our current monetary system is  not the control it gives to states but, on the contrary, the power it  gives to banks, and specifically the way that it ties the production of  money systemically to the creation of debt.

Significantly, a currency such as Bitcoin offers answers of a sort to  both of these criticisms of the monetary system as it is now configured  – albeit answers that do not necessarily point in the same direction.  Indeed, having such varied reasons for supporting Bitcoin makes for some  intriguing and seemingly contradictory political and ideological  alliances around cryptocurrency in general. In wanting to divest banks  of the right to create money, Bitcoiners (and other cryptocurrency  enthusiasts) share common cause with movements such as Positive Money in  the UK, and with the Chicago Plan, first conceived by Frederick Soddy  during the 1920s and subsequently advocated by Irving Fisher and Henry  Simons in the aftermath of the Great Depression.[3]  But there is a crucial issue that sets Bitcoin apart from Positive  Money. Whereas those who support Positive Money argue that money’s  creation should be placed in the hands of a politically accountable  central bank committee (hence we would have something they call  “sovereign money”), Bitcoiners believe that only technology can be  trusted to do such an important job. In this sense, the broader appeal  of Bitcoin is not simply that it takes money away from the control of  banks and states, but that it removes politics from the production and management of money altogether. And it is in this sense, particularly, that I would refer to Bitcoin as utopian.

Like many forms of money, from the Bristol Pound to the Euro, Bitcoin  is underpinned by a series of ideals about the organization of society,  and the role that money plays within it. But unlike those other forms  of money, Bitcoin seeks to achieve these aims by technological means.  This is not to suggest that Bitcoin is apolitical – quite the contrary,  in fact. Arguably, the notion of distributing power throughout the  network of computers that are responsible for producing the currency –  and, just as importantly, distributing the record of transactions  throughout the network by means of the blockchain – is perhaps the most  crucial of its utopian aspects, which has much in common with the sort  of “horizontalism” associated with recent social movements such as  Occupy.

Bitcoin is essentially a techno-utopia. With Bitcoin, the regulation  and control of money will be achieved not through trusted sources of  authority – politically accountable human experts, for example – but by  machines. In monetary terms, this is most obvious in the case of the  production of money itself: the software is programmed to generate a  specified number of Bitcoin every ten minutes or so, and this production  is programmed to stop when the total number of Bitcoin reaches 21  million. In one sense this reflects quite a conservative understanding  of money: Bitcoin is like gold, or land, whose fixed supply underpins  money’s value. Ironically, given that at least some of Bitcoin’s  supporters are on the political Left, this is a theory of money that has  much in common with the austerity policies that have been pursued  within the Eurozone, and are the cause of so much criticism of Germany,  which has been most outspoken in its advocacy of austerity through  so-called “sound” money policies – emphasising cuts in expenditure, debt  reduction, and a commitment to preventing inflation so strong that  verges on paranoia – for the Eurozone as a whole. These are the  policies, and the politics, against which Syriza was elected in Greece.  Some Bitcoiners might not appreciate the comparison, but it is  impossible to avoid. If Bitcoin was ever to become the  predominant form of money, the outcome would be something akin to  hyper-deflation. Nobody seriously believes that this will happen, of  course. As the Wall Street Journal’s Michael J. Casey and Paul Vigna argue in their outstanding new book, The Age of Cryptocurrency,  Bitcoin – or, more likely perhaps, several other cryptocurrencies  without Bitcoin’s design flaws – is more likely to play a relatively  minor (but nevertheless important) role in the monetary and financial  system of the future, namely, as a small and relatively hidden part of  the payments system where its low transaction costs are attractive. One  such area where Bitcoin is already being tried is in international  remittance payments, where M-Pesa has made a significant impact (by  reducing transaction costs and thereby making payments services more  accessible to the unbanked), and BitPesa (which claims to cut  transaction fees by almost half as much again, compared to M-Pesa) is  worth watching for this reason.

For all of its qualities as a techno-utopia – whether we agree with  these or not, and irrespective of our views about the technical  competence of Bitcoin’s design – the currency has not lived up to the  techno-hype surrounding it. Despite the claim that Bitcoin is a  horizontal network, which is politics-free because it distributes the  power of money creation, the currency is characterized by a strikingly  high degree of political hierarchy and social organization. This is not  about wealth concentration, but monetary production. If someone – say, a  Winklevoss twin  – chooses to accumulate a large percentage of Bitcoin by buying them on  the open market, this tells us nothing about the world that we don’t  already know. What matters, however, is that Bitcoin’s production  is being dominated by a very small number of mining pools, indeed the  software favours the most powerful producers and incentivizes  monopolistic practices. If you want to mine for Bitcoin, your best – and  perhaps only – chance of doing so successfully is to join such a pool,  for example by renting space on a larger mining rig. This means that  the Bitcoin network is not quite as “distributed” as its advocates  claim, indeed one could argue that it demonstrates quite a strong  tendency towards the centralization of monetary production by massively  favouring those with more processing power. It is ironic, but  significant, that this is a result of technical features of Bitcoin’s  design. I say significant, because it suggests that another  cryptocurrency with a new design might avoid this tendency to  concentrate monetary production so much – which is exactly what  designers of other altcoins, such as Litecoin and Dogecoin, have been  claiming. This further underlines the importance of looking beyond  Bitcoin when considering the potential role of cryptocurrencies in the  future of money. In this regard, Bitcoin tells us something important  about the relationship between technology and the social context of its  use. To express the point more bluntly, technology cannot enact social  organization on its own. As a form of money, Bitcoin has been sustained  by social relations – structure, leadership, hierarchy, friendship and  community – much more than it has evaded them. This is not necessarily a  bad thing. My point is simply that the reality of Bitcoin – its social  reality – is at odds with the theory behind it.

Bitcoin was (and still is) trumpeted as a currency that could  overcome difficulties arising in conventional monetary and payment  systems whenever trust breaks down (or is breached). In his original 2008 paper  heralding Bitcoin, Nakamoto argued that “the root problem with  conventional currency is all the trust that’s required to make it work”.  In one sense this is complete nonsense: money always requires  trust in order to work, simply for people to accept it as payment. But  Nakamoto was specifically referring to two things: first, the trust we  place in the monetary policy makers – central bankers, for example – to  act responsibly; and second, in the specific context of digital  currency, the trust we need to place in one another not to double spend.  These are critically important aspects of Bitcoin today in that they  point to two separate development trajectories in Bitcoin’s future. The  first relates directly to money. Although it is open to debate whether –  as Nakamoto alleges – the trust in fiat monetary systems has been  fatally undermined, he was surely right to criticize a system that  enables banks to “lend [money] out in waves of credit bubbles with  barely a fraction in reserve”. In this sense, as I have already  suggested, Bitcoin is in tune with political sentiments that emerged  after the 2008 financial crisis.

The second trust issue points to wider applications of blockchain  technology beyond money. The idea of keeping failsafe records through a  distributed network that does not rely on trusted (but potentially  inefficient, corrupt or incompetent) intermediaries is perhaps the most  radical aspect of Bitcoin, and will be pivotal to a future that will be  much broader than money alone. This is not to say that Bitcoin has no  relevance to the future of money. I very much hope that it does. But for  the reasons stated here, I believe that its role will be a partial one –  and rightly so. A world in which all money is organized along  the lines of Bitcoin, with money’s production strictly controlled, would  suffer from hyper-deflation. This is very unlikely, however. Bitcoin,  and cryptocurrencies in general, are part of a pluralistic future for  money: they widen our options, achieve things that other currencies  cannot do, and reach people (such as the unbanked) that other monies do  not reach.


[1] These Developments, And Particularly Their Implications For The Politics Of Personal Identity, Have Been Written About In Great Detail In David Birch’s 2013 Book, Identity Is The New Money.

All by
Nigel Dodd